Common Retirement Planning Questions About Taxes

As we approach the end of the year, saving money on taxes becomes a bigger focus for many people. But let’s broaden the scope out for this particular episode and focus on some of the most common retirement planning questions about taxes. We’ll talk about mistakes to avoid and how a proper plan can make a significant difference in someone’s tax savings.

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Transcript Of Today's Show:

Speaker 1: Back here for another episode of Plan with a Tax Man here on the podcast with Tony Mauro and myself. Talking investing, finance, and retirement. We try to bring all sorts of different topics to you. This week it's going to be common questions about taxes and specifically maybe taxes in the retirement planning phase, not necessarily the working years, but we might touch on a little bit of that too. But that's going to be the main approach this week here on the show. And who better to do that with than... Well, a tax guy. Tax doctor himself, what's going on, Tony? How are you?

 

Tony: Thanks, man. I'm good, thank you. Yes, finished up... Well, officially the '21 tax season. And so, this is a timely topic because it's-

 

Speaker 1: The '21 tax season?

 

Tony: Yeah, with extensions just recently-

 

Speaker 1: Wow.

 

Tony: Yeah. But still people... And people trickle in all year, but now's the time for the rest of the population to plan for '22. And so, I think there's some good topics, questions here to discuss.

 

Speaker 1: Oh yeah, I guess that is true. Yeah. When you do extensions, boy, it's easy how you forget that, right? It's like-

 

Tony: Yeah, you forget it, yes. Yeah.

 

Speaker 1: I hear you say '21 and I go, "What? There's no way." But it's like, "Oh yeah, that was last year." And then it was... Most of us do it in April, but then if you did extensions then yeah, okay. And you know what? There's two differences here. So you just said most of... We need to start thinking about '22, and that's tax planning.

 

Tony: Excuse me.

 

Speaker 1: That's tax prep-

 

Tony: Excuse-

 

Speaker 1: ... that's tax preparation for the calendar year. But there's also tax planning and that is year over year, especially for retirees. That's where you can make a real difference in and often a huge difference in how effective your retirement plan's going to be. Because it's not just the annual thing, it's how to be efficient through multiple years in retirement.

 

Tony: That's right. And you have to think big picture on a lot of these things because it takes multiple years to realize the real savings of a few of these things we're going to talk about. At the end of the day, we always make fun of the government and at some things-

 

Speaker 1: It's so easy to do, though.

 

Tony: Yeah, it's easy to do [inaudible 00:02:01] Sam. It's there with his hand out for a part of your retirement money and you want to try to minimize that as much as possible. Because obviously, that means a bigger nest egg for you.

 

Speaker 1: I was talking with a friend the other day, he's a CPA, he's also a financial specialist now as well. But he was talking about, and he was being very honest, he said for the first half of his careers as a CPA, he was one of those CPAs that would say, "Yeah, defer. Why would you pay taxes now? Just kick it down the road." Absolutely. And he's like, "And you know what? That's our job. As a CPA, we're focused on the current year. It's a historical review of the prior year." But he's like, "But as I got more into the retirement side and the personal financial specialist side, it became more clear that I was wrong for a number of years." It's like, "No, we've got to think about taxes currently, but also into the future and how we're going to be efficient and manage that." So that's kind of the topic today. And I thought that was a great way to hear someone who's been in the industry for 30 years realize that 20 years into it, he's like, "Whoa. I got to make a shift." So let's start with common question number one, deductions. Am I going to have as many deductions in retirement as I did while I'm working? And under the current tax code, that's probably a big no, you're probably not. But if they sunset, Tony, and go back to what they were under the Obama administration, maybe, is that fair?

 

Tony: Yeah, that's a fair statement. We're getting closer to that. I think it's '25 or '26.

 

Speaker 1: Starts in '26, yeah.

 

Tony: Yeah. The sun setting starts coming back. If they don't keep it... Again, you don't know what they're going to do, but I would say for a lot of us, most of the time in your earning years when you've got debt and you have some things you can deduct, those eventually go away by default because you pay everything off and there's just not much there to deduct. And with the IRS's thresholds, you have to get over to itemize and then use medical and all of that kind of thing. You really have to have a lot of it to be able to deduct it. So a lot of times you may not have those deductions, which if everything else being equal means your taxes are higher even... I mean, before the politicians do anything. So you got to pay attention to that. And we'll refer back to that as we answer some of these other ones here.

 

Speaker 1: Okay. Well, let's talk about the fact that I think our society, the way we're set up, whatever the case, however you want to word that, we assume that our taxes are going to be lower in retirement. Of our generation, for sure, we're in our 50s. It's like, "Hey, you get a job, you go to work. You spend 30, 40 years there, you're not going to have a pension more than likely, but you're pumping into your 401k and when you get to retirement, you'll be in a lower tax bracket." And I've been talking to advisors for years now and that is just not the norm, but yet we still think it is. How often do you see that?

 

Tony: I see it. It's definitely not the norm anymore. I think that's what... When you're talking about your CPA friend, back in the day, that was the norm. It's like, "Well, the idea was kicked can down the road with the taxes, you'll be in a lower bracket because you won't be working, and then therefore you'll save taxes."

 

Speaker 1: And tax rates were higher.

 

Tony: Yeah, and tax rates were much higher. Historically, even though we don't like it, tax rates are very low compared to what they used to be. You look any charts back in the 60s and 70s and they were high even into the 80s. And nowadays, even though we don't have the pensions, people that have done well in the 401ks and are continuing to work, it's very likely that your tax rate could be the same or a little bit higher than when you were working. Depending on if you don't plan right and you have all this money flowing into your income situation that's never been taxed, now all of a sudden your income is a lot higher and boom, you're in a different bracket and you're paying more.

 

Speaker 1: And Tony, I think what happens here, here's the conversation about being in a lower tax bracket in retirement. I think what also has happened is we've kind of gotten to this mode of, it just happens kind of like retirement itself. I think we've been lulled into this thinking of, "Well, when I get to retirement age, I'm going to be in a lower tax bracket and I don't have to do anything about it. It just will happen naturally." Almost kind of like it's a given. And so, people might be listening and saying, "Well, I know I could get into a lower tax bracket." And I'm not saying you can't and that's where some... But you have to strategize and plan. It doesn't just happen naturally. If you want to be in a lower tax bracket in retirement, you're going to have to do some things to ensure that happens. Is that a fair thing?

 

Tony: Absolutely.

 

Speaker 1: Yeah.

 

Tony: Yeah, I mean you definitely have to do some things and do some planning or it won't happen. And then it's hard to change once you get that income flown in your retirement.

 

Speaker 1: Yeah. It's not like social security, like it's this given, right? Oh well, your retirement age, you also get here, here's a free... There's not like there's a bonus social retirement age tax bracket, right?

 

Tony: Yeah, that's right.

 

Speaker 1: You have to plan it. You want to be in the lower one, you got to strategize. Are all retirement accounts tax the same, Tony?

 

Tony: They're not. No. And I think that's where people kind of go arise. They just sometimes assume that. An easy example is you've been putting money into your 401k for 30 years and it's coming out pretax and then you decide to start pulling money out. None of that money plus the earnings has been taxed and you're going to be taxed on all of that. Versus, for example, you take some money out of your Roth IRA that you've been putting money into and none of that money is taxed because that was after tax money. And so, that's not taxable versus you've got maybe... You're at the age where you're taking social security in all this and part of that is taxed because of the way the rules are. So in my mind, three different things. There's no tax, which there's not that much of that. There's some tax, and then there's all of it's taxed. So you have to plan around this so that you can really take advantage of that. Because some of the mistakes I've seen people make and the biggest one is they start taking social security early when they have all this other potential income and they don't need it, they're still working and then they come to find out that up to 85% of it's taxed and on top of that they're reducing it because I'm still working and I'm not a normal retirement age and they're really giving a lot of money back. And so, I would definitely suggest you talk to your advisor or someone about that before you start taking money in retirement.

 

Speaker 1: Yeah, and you got to think about the types of accounts, the way they're taxed. We talk often about tax buckets, excuse me. About income buckets. Well, they're same thing, right? Tax buckets as well. Where do you want to take from? How are we taking from because what's the tax implications of those? Do we want to do conversions to lower some of our future taxable bill? And if so, how do we do that efficiently without bumping ourselves up in a tax bracket? And that's going to come into, I think, play into my next common question here for you, Tony. Is I have to touch on the fact that we see these ads, we hear these sayings, these slogans, we see these things in the mail we get. Get a tax-free retirement income, get a tax-free income in the retirement and pay no taxes. And how real is it? Is it viable? Is it actually real to think that you can get tax totally tax-free? And just what's to know here?

 

Tony: Well, I think the first thing is better do a lot of research. There's all kinds of things that people twist words and some of it may not be totally true, that's the first thing. But there are some ways to potentially do it. I mean, a way, and a lot of people don't realize this because they don't generally do it. But this is an area which you talk about tax-free bonds. This is just an easy one. Municipal bonds are not taxable at the federal level. If you get some from your state, they're not taxable at the state level. So theoretically, you can go out and invest all your money and that's municipal bonds, which are generally very safe. Now, they don't pay a whole lot of interest at the moment, but it's tax-free and you never have to put that on your return.

 

Speaker 1: Interesting. Okay. So-

 

Tony: That's one way.

 

Speaker 1: ... I guess there's a way... There's one way to actually make it true. I think where we hear this, Tony, is probably two ways and I want to have you address those. One is something like a universal life policy or something.

 

Tony: Oh yeah, I knew you're going to... Yeah.

 

Speaker 1: Yeah, that's usually one. And the other one is, like I just mentioned, so if you've got a million dollars in a 401k, so one might say, well let's convert all of that to a Roth and technically, it's tax-free in retirement. Now, you're paying the taxes now .

 

Tony: Paying the taxes now, yeah.

 

Speaker 1: But it is tax free in retirement.

 

Tony: It is, yeah. I mean, that's one. And that is a good strategy and we've used it before, is to, "Hey, let's start taking some money out now, converting it to a Roth, paying taxes now, but only fill up the bracket that you're in." Let's not go into the next bracket, so you got a huge tax bill. And just over time get it to a totally tax-free area versus again at retirement with Uncle Sam with his hand out there saying, "Give me some money." But you're still paying him but hopefully, we're spreading it out and we're doing it in a lower tax bracket than we think you'll be in. I think if you get into the stuff, especially with some not knocking insurance, because it has its place where you get some of that sophistication of, "Well, let's take all your money and put it into a universal life and then we're going to show you how to take money out of this tax-free." There are some ramifications there and you got to be very careful with the pitfalls and penalties and things like that with that kind of stuff. But it does have its place as long as you know that it's going to work for you.

 

Speaker 1: So there are some viable strategies, but again, it doesn't happen naturally. You got to work at it, you got to strategize.

 

Tony: No, you got to work at it, yeah. You really do to get tax-free income in retirement, yeah.

 

Speaker 1: Okay. And that's really the importance of working with a professional and it's not just a financial professional. So Tony, we know that there's all kinds of levels of financial professionals now. It seems like everybody can call themselves one. There's some that are just brokers only. They're stock brokers only, if you will. There's some that are insurance only. There's some that can do both sides, equities and insurance. And then there's some like yourself who are a CFP but also are a tax professional. Same thing I was talking about with the other person. There are some that are automatically I think... Because many will say, "This is a good strategy, let's do this, this or this." And then consult your tax professional to see how it's going to affect you. I like working with some... I mean, this is just my opinion, but I think there's some real value in working with someone who has all of this under one roof. Maybe it doesn't have to be the same person, for example, but they've got a CPA on staff or something like that. That's just my thought, but what do you think?

 

Tony: Well, I'm biased, but I do agree. I mean, at the end of the day, taxes is really where it's at. It all comes down to nobody wants to pay any more taxes than they have to.

 

Speaker 1: Especially in retirement.

 

Tony: Especially in retirement. And I think a lot of the advisors, when people will call me and say, "Well, my advisor told me to call my tax pro." And say, "Well yeah, because they don't want to... One, maybe take the risk of getting it wrong, but two, maybe they don't know." And so we want to tell you, here's the goods, here's the bads from a tax standpoint and you decide if you want to do that. But yeah, having it all in the same roof with us in that regard, that's what we do. We say, "All right, that all sounds good, but let me tell you about the taxes and how we have to work to do this and the goods and bads." And then you get to say, "Yeah, I still want to do that."

 

Speaker 1: Okay, and I think that's fair because whatever adage you want to put to it, it's not what you make, it's what you keep, so on and so forth. But in retirement, we're no longer having the paychecks coming in. We're turning everything we've built over the last 40 years or whatever into our money and into our paychecks. And we've got to be as tax efficient as possible because that's what's going to help us hopefully get that longevity out of the money that we're after, right? Because you're not making anymore, so you're not-

 

Tony: That's right.

 

Speaker 1: ... I mean, yeah, hopefully, you're making some in the market or whatever the case is and we want to keep up a little inflation and all that kind of stuff, but normal inflation at least anyway. So again, taxes are hugely important to the overall retirement strategy. One more common question, Tony, that I wanted to ask you. And that's the concept around the tax-free state. Well, we'll use California, we've seen this mass exodus from California for a lot of reasons, but one really big one is it's killing people from a tax standpoint, right?

 

Tony: It really is, the tax states, yeah.

 

Speaker 1: Yeah. I mean, even Elon with all his money's, he's like, "I'm out of here." And he's got tons of money. So how viable, and let me put this in this way for you. How viable is it to say, I'm going to move from a high tax state, let's say California or New Jersey or something like that, to a state like Tennessee or Florida or Texas, where they don't have any income tax. I think if you're wanting to move to that area for other reasons, then-

 

Tony: That's right.

 

Speaker 1: ... it could be gravy. Would you move solely on that reason?

 

Tony: I wouldn't move solely on that reason because you got to take a look at, "Okay, well, how else is this state raising its money?-"

 

Speaker 1: You're right.

 

Tony: ... Everybody's got to have money to run the state, so it's-

 

Speaker 1: It sounds great, right?

 

Tony: Yeah.

 

Speaker 1: But they're going get-

 

Tony: It sounds great, But it could be higher sales tax, could be real high property tax, could be some other types of taxes.

 

Speaker 1: County tax. So think about Florida, for example. Yeah, but each individual county has different taxes.

 

Tony: Yeah, there's local taxes and things like that. And so, you want to take a look at that plus the general cost of living in some of those cities. Is it going to cost me more to live? And so, is that really going to maybe negate some of my tax savings type of thing?

 

Speaker 1: It's a little-

 

Tony: Iowa. OH, go ahead.

 

Speaker 1: I'm thinking it's a little more costly to live in Orlando than it is or Miami than it is in Cedar Rapids, right?

 

Tony: Oh yeah.

 

Speaker 1: It's just the hair.

 

Tony: Yeah. I mean, but we've had that in Iowa, not as bad as some of those real high tax days, but Iowa was always in about the top 10 highest tax states and-

 

Speaker 1: Really? Okay.

 

Tony: ... what they've done over the years and right later on... I mean, they say that they're making money from other sources, because that's always my thing as well. If you're going to cut taxes, which they've just done. So now starting in '24, retiree's income is completely exempt from Iowa Tax. So we, as a retirees, you don't pay any taxes here. Now, if you're out working and things like that, you do-

 

Speaker 1: Sure, yeah.

 

Tony: ... but yoru just retirement income. So that's kind of a break for retirees here from a relatively high tax state down to that.

 

Speaker 1: That's pretty nice.

 

Tony: And so, try to keep them here. Because I mean, the weather is not conducive like some of the... I call those, some of those states like Florida, that's your weather tax down there. It's-

 

Speaker 1: True.

 

Tony: ... some of those other taxes. But the point is that you need to look at some other things because just the income tax... Maybe [inaudible 00:17:09] of that-

 

Speaker 1: It's probably not going to make or break your plan, right?

 

Tony: Yeah, no. But like you said, if you're planning on moving somewhere sunny or I've always wanted to be in Nevada, let's say, and I'm going to move there. Yeah, that's kind of icing on this cake.

 

Speaker 1: But yeah, then let's go ahead and factor that into the plan for sure. And it might help out along the way. But yeah, I don't know that it's necessarily going to just make your whole plan. It's not the one missing cog in the wheel, if you will, in the machine. And of course, I was just talking with somebody the other day about Florida, and this was obviously even prior to the hurricane, but yeah, they gotten wise too. You can't just say you live in Florida now just because you might have a second residence. They want to see a lot of... They're making you jump through some hoops to make sure that you actually live there-

 

Tony: Yeah, oh yeah.

 

Speaker 1: ... to live there and long enough to claim that as your main state. So again, those are just some common questions around taxes and retirement.Again, the biggest one is if you want to have reduced taxes, excuse me, in retirement, you've got to plan for it. You got to strategize for it. It's not going to just happen on its own through a series of... I mean, maybe through a series of the right steps that you just did and didn't realize. Sure, it's possible. But like anything, the world's changed so much that... It just really does require strategizing and planning to be as efficient as possible. And that way you can also be efficient not only for your retirement years but whatever you might leave behind as well when you move on in that legacy section, you want to be as tax efficient to the kids for the most part as that. Of course, some of you do, some of you might say, "Hey, they can pay the tax bill. I don't care."

 

Tony: Right, yeah.

 

Speaker 1: So everybody's different. Tony, thanks-

 

Tony: [inaudible 00:18:47].

 

Speaker 1: ... for hanging out, my friend, as always. I appreciate it.

 

Tony: All right, we'll talk to you next time.

 

Speaker 1: Yeah, we'll catch you next time. Again, if you've got questions, folks, around taxes, who better to talk to than the tax man, reach out to Tony and his team at Tax Doctor. And they are Des Moines' professional alternative. Of course, they have clients all over the country as well. But reach out to them, find them online @yourplanningpros.com. That's yourplanningpros.com. Don't forget to subscribe to the podcast, Plan With The Tax Man on Apple, or Google, or Spotify, whatever platform you like to use. You can find it all at Tony's website as well. He's been helping families for 20-plus years, boy, about 25 or so now, right?

 

Tony: Well, 26-

 

Speaker 1: 26, okay.

 

Tony: ... be 26 this year.

 

Speaker 1: So there you go. So reach out to Tony and get started today. If you got any questions, need some help, and we'll see you next time here on Plan With The Tax Man.

 

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